Generally speaking, your business will pay and claim VAT on a quarterly basis. There are options to pay your VAT on a monthly basis, which can help to reduce the quarterly impact on the business’s cash flow.
Annual accounting scheme
If your turnover is less than £1.35m, you can apply for the annual accounting scheme. With this scheme, you account for your VAT in 12 monthly instalments across the year and then make one VAT return at the end of the year.
- You make advance payments towards your VAT bill, with the amount being based on your last return (or an estimated amount if you’re new to VAT)
- When you submit your annual return, you then either make a final payment, or apply for a refund – all depending on the difference between your advance payments and your actual VAT bill.
Why move to monthly periods?
If your business receives regular VAT rebates, and you rely on these rebates to keep trading, then moving to monthly VAT can be a great way to help your cash-flow situation.
If you want to spread the impact of your VAT payments by going monthly, the annual accounting scheme will do this for you.
Why stick to quarterly periods?
If you’re a business that has a lot of VAT to claim on purchases and expenses, the annual accounting scheme won’t work for you.
You only get to claim back your VAT when you file your return at the end of the year. Because you only get your VAT back once a year, this would be bad for cash flow and you’ll be better off with quarterly periods.
Once you’re VATable turnover is over £1.6m, you have to come off the annual scheme.
Should I move to monthly?
If you feel that moving from quarterly to monthly periods will be an advantage, you’ll have to put a business case to HMRC to explain why you need to move to the annual accounting scheme.
One scenario to consider is if your sales are zero-rated and you incur input VAT (meaning the business is always in a repayment position). If that’s the case for your business, it's worth going to monthly to get the money back.
If you want advice on which VAT period is best for your business, give us a call on 01454 300 999, or drop an email to firstname.lastname@example.org